The stock prices of Fannie Mae and Freddie Mac are undervalued, even if reform legislation limits the size of their retained mortgage portfolios, according to Jonathan Gray of Sanford C. Bernstein & Co.Mr. Gray, in a report issued last week, noted that Rep. Richard Baker's proposed legislation does not place a cap on the GSEs, though some critics, including Federal Reserve Chairman Alan Greenspan, have called for a cap on the GSE portfolios. Without a cap, Mr. Gray estimated that the GSEs each have a fair share price expectation of between $70 and $75 based on 2006 earnings estimates. With a $200 billion portfolio cap, the share price range would drop to $60 to $65 per share.

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